...The current recession has revealed the weaknesses in the structures of modern capitalism. But it also revealed as useless the mathematical contortions of academic economics. There is no totemic power. This for two reasons:

(1) Almost no-one predicted the world wide downtown. Academic economists were confident that episodes like the Great Depression had been confined to the dust bins of history. There was indeed much recent debate about the sources of "The Great Moderation" in modern economies, the declining significance of business cycles…

… I myself was so confident of the consensus of the end of the business cycle that I persuaded by wife after the collapse of Lehman Brothers to invest all her retirement savings in the stock market, confident that the Fed would soon make things right and we could profit from the panic of a gullible public. The line "Where is my money, idiot?" is her's.

(2) The debate about the bank bailout, and the stimulus package, has all revolved around issues that are entirely at the level of Econ 1. What is the multiplier from government spending? Does government spending crowd out private spending? How quickly can you increase government spending? If you got a A in college in Econ 1 you are an expert in this debate: fully an equal of Summers and Geithner.

The bailout debate has also been conducted in terms that would be quite familiar to economists in the 1920s and 1930s. There has essentially been no advance in our knowledge in 80 years…

.. Recently a group of economists affiliated with the Cato Institute ran an ad in the New York Times opposing the Obama's stimulus plan. As chair of my department I tried to arrange a public debate between one of the signatories and a proponent of fiscal stimulus -- thinking that would be a timely and lively session. But the signatory, a fully accredited university macroeconomist, declined the opportunity for public defense of his position on the grounds that "all I know on this issue I got from Greg Mankiw's blog -- I really am not equipped to debate this with anyone."…

My recollection is that Paul Krugman has done pretty well over the past few years, but he’s been the exception.

I don’t think this is a fixable problem. We don’t have the science to understand the real economic world. We need something like Asimov’s “psychohistory”, but I’m not holding my breath.

In the meantime though, it would be nice if economists would be a bit humbler.